Indian Stock Market

There was an interesting development on Mind tree management when Mr Anjan Lahiri resigned from his position. He was a co-founder of this business and head of IT services which generates almost 70% of this business revenue. Does he not in the boat and not rowing will really impact to this business? Well, we […]

A dozen of IT companies on our radar…

What is your investment theme? The reporting season is in full swing and Value operations platform has updated so far almost 300 businesses results of the NSE market. One of our themes of investments in India is in regards to its IT sector. It is very hard to believe any investors in India not […]

HUL investors Dilemma…!!

Is HUL is really worth for Rs 600 to buy or sell….? When HUL came out with its annual results last Monday, everyone on Dalal street were talking about how expensive is the stock price. Next day as soon as its parent company Unilever offered to purchase 22.5% stake in its own business for […]

Swaraj Engines: Suprise Dividends…!!

A jump in Swaraj Engine on the news of special dividends of Rs 20 per share was like early fireworks of Diwali. A dividend of Rs 33 per share on a market price of Rs 446.60 is a return of almost 7% on theinvestments. But are the investors not getting the bottom line of […]

How to become poor

Reliance Industries is a very popular business in India. A lot of emotions are attached to this business for lot of investors and traders in the market. Many investors have written emails to me in regards to this business and I have also participated in many discussions and have written posts in past. After […]

Swaraj Engine: Yesterday – Today – Tomorrow…

I have written a post almost 15 months back on Swaraj Engine and it was similar position where we stand today in regards to investment within this business. Unfortunately, its market price is almost similar to what it was trading 15 months back. It won’t be fair not to disclose that its marketprice per […]

I know, we Indians love gold. And to prove our love, we have topped as the biggest gold consuming country. Our traditions, culture and history always claim our love for ornaments and specially if they are made of gold!

Buying gold for personal consumption is understandable, but buying as an investment to me is like putting your foot on different land. In my very close social contacts, I know many who keep buying gold every month or quarter as an investment. Many of you who are reading this might be doing same and I won’t blame you. It is that price spark in last decade that have given almost 400% returns on investment.

In simple terms, on one side of the investing coin is the idea that you lay out money today to get more back later. The flip side is that by purchasing today you forgo consumption today for the ability to consume more later.

Both the ideas above are not same and specially with the latter idea we are introduced to inflation. Investing for latter idea suggest, the purpose of investing is to at-least maintain or increase our purchasing power.

To this context Buffett observes:

“Even in the US, where the wish for a stable currency is strong, the dollar has fallen staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax free institution would have needed 4.3% interest annualy from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themseleves if they thought of any portion of that interest as “ income.””

Who knows better than us about the ‘blow’ of high inflation. Many investors write to me that, with high interest rates available in market through various banks, we are happy with our income through that investments and would avoid investing in Equities. It is worth to rethink after reading words of wisdom from Buffett.

Recently, I was going through the excerpt of Buffett’s forthcoming letter to its shareholder which you all can read by clicking here.

The most important subject for Indian investors in that letter appears to me of gold. Melted down all the gold would amount to one 68 cubed foot of uselessness. To get better understanding of purchasing power he compares that cube with – all the agricultural land of United States, sixteen companies as valuable as Exxon and a trillion dollars in walking around money.

He defends buying businesses is a superior strategy as companies throw lots of dividends to shareholder and land would have produced food. To me these remarks suggest me that he is trying to convey message that buying gold is not idle investment because ‘that just sits there’.

We, at Value operations also believe in what Buffett is trying to explain and would prefer buying available companies that produce gold rather than buying gold itself.

I believe Buffett’s take on investment landscape is correct. Bubbles are always followed up by a bust and nothing goes up forever.

“What motivates most gold purchasers is their belief that the ranks of fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”

Buffett had always claimed that stocks are the best opportunity to invest to increase your purchasing power. I still remember in 1974 Buffett was very cautious proponent during high inflation time. When Forbes asked him during that time how he felt about the stock market, he replied, “like an oversexed guy in a whorehouse”. His 1979 newsletter to its shareholders serves a good reference to understand the limits of any assets to retain its purchasing power during high inflation.

“Just as the original 3% saving bond, a 5% passbook savings account or an 8% US treasurey note have, in turn, been transformed by inflation into financial instruments that chew up, rather than enhance, purchasing power over their investments lives, a business earning 20% on capital can produce a negative real return for its owner under inflationary conditions not much more severe than presently prevail.

If we should continue to achieve 20% compounded gain – not an easy or certain result by any means – and this gain is translated into a corrosponding increase in the market values of Berkshire Hathaway stock as it has been over the last fifteen years, you after tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax anytime you wish to convert your twenty percentage points of nominal annual gain into cash.

That combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gain tax on retained earnings)- can be thought of as an “investors misery index”. When this index exceeds the rate of return earned on equity by the business, the investors purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.”

I take this wisdom as another warning for all of us to stick with high return on equity businesses…

Remember that when you buy any stocks, unlike commodities, there exists management risk, execution risk, result risk, competitor risk, economic risk etc. anything can go wrong in a business and frequently does. And while Charlie Munger has pointed out that, “almost all good businesses engage in ‘pain today, gain tomorrow’ activities”, you must know what you are doing.

I personally think indeed the best opportunity to retain and increase your purchasing power is by investing in stocks, but in good quality stocks. Knowing what you are doing and sticking to high rates of return on equity with little or no debt and to A1 and A2 businesses will increase your chances of doing better than stock index and inflation.

We have noticed that many new bloggers have joined our community in recent months. To all of them, with whom I have not interacted by any means, I take this opportunity to welcome you all and appreciate all of your inputs to build this blog as a knowledge bank for value investors.

If you gone through my earlier post and have studied the approach we advocate at Value operations, then let me remind you that this approach is not new to value investing. We have just designed a process to implement what all great investors have been teaching us for decades.

Value investing has worked very well for us and many others who implement on those teachings. We think you should include following 5 most important things in your research work and only invest if you tick all those boxes and if that company is offering a good Margin of Safety.

Those five things are as follows:

1.Good long-term prospects of the company.

2.Excellent Return on equity with sustainable competitive advantage to sustain those returns.

3.Less or no debts

4.Surplus cash flow

5.Quality Management

If you find all those characteristics in any company, we call them extra-ordinary businesses and they are worth to invest when they are trading at cheap.

All the above things are not new or we didn’t just come up with those ideas overnight. Many of the great value investors have advocated about those qualities. We have just refined the process which can easily be executed by retail investors and help them in their research.

What we want to share with you all is the same thing but in the voice of all those investors. There are five clips, all together of approximately 2 hours. But let me assure you that those 2 hours are worth spending listening to them if you have not before.